Checking vs Savings Accounts – and Why You May Need Both
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When you start making money, you need a place to put it (and not under the mattress). That’s where opening a bank account can help. One of the first steps in personal finance is opening a bank account, choosing either a checking or savings account, or both. These two accounts can work together and be the building blocks of your financial life. But do you need both accounts? What are the differences? Below we break down the pros and cons as well as the differences between checking and savings types of bank accounts.
In this article
What is a checking account?
Think of your checking account as your main finance hub that directs all money coming in and going out. Your checking account is a place you can deposit your money with a financial institution and then pay bills and spend money from that account.
Money comes into your account, typically through your paycheck (such as with direct deposit). You can spend money from that account using a check as well as a debit card.
So if your landlord still takes checks, you can write one and the money will be taken from your checking account. If you use your debit card for transactions, the money will be taken out of your checking account to cover the cost.
A debit card can be used similar to a credit card but the main difference is that a debit card is connected to your cash and isn’t taken from the credit you borrow (also, your debit card doesn’t help you build credit).
So that means when you spend money using your debit card, your account will subtract that money in real-time from your account. It’s also possible to overdraft, which is when you spend more money than what is in your account. In that case, you may have to pay an overdraft fee. Some banks have overdraft protection.
Aside from writing checks and using a debit card, typically you can pay for bills online from your checking account or have an automatic transfer to a savings account.
What is a savings account?
You can think of your savings account as your online piggy bank, but cooler and better. Using a savings account, you can take money and put it in an interest-bearing account.
Traditional savings accounts offer a low Annual Percentage Yield (APY) however a high-yield savings account can offer competitive interest rates. Savings accounts are good for saving for emergencies or a vacation or any other financial goal.
Some savings accounts may have a minimum opening deposit or minimum balance requirements. If you don’t meet the balance requirements, you can get hit with a monthly maintenance fee. Because the point is to save, you are limited to several transactions versus a checking account, which can be used for everyday transactions.
Checking account vs savings account
Before opening a checking or a savings account, you want to understand the pros and cons of each so you know what you’re getting into.
Checking account
Pros
- Easy to use for day-to-day spending. Using a checking account, you can easily spend the money in your account using a debit card or writing a check. You have the convenience of a credit card but will only spend the money you have in your account.
- Make payments/transfers. Using your checking account, you can use bill pay or transfer money to your savings accounts.
- Access to an ATM. If you need physical cash, you can access ATMs that can give you money withdrawn from your checking account.
Cons
- Little to no interest. Unfortunately checking accounts don’t offer much in terms of APY. Checking accounts may offer some interest that is nominal or no interest at all.
- Fees. Some banks have monthly maintenance fees and minimum balance requirements. In other words, if you don’t have a certain threshold in your account you could get hit with a monthly account fee. If you spend more than you have in your account, you may be charged overdraft fees.
Savings account
Pros
- Higher APY. A savings account can earn account holders more interest in your deposits. If you go with a high-yield savings account, you can maximize the money you earn from high interest. Savings accounts are attractive for this reason.
- FDIC-insured. When you save a large sum of money, you want to make sure it’s safe. Savings accounts are FDIC-insured (Federal Deposit Insurance Corporation), which means that if a bank fails you’re insured for $250,000.
Cons
- Withdrawal limits. A savings account caps your withdrawals at six per month.
- Minimum balance requirements or opening deposit. Some banks may have a minimum balance requirement that you need to hit or you will be charged a fee. Plus, you may need a minimum amount to open a savings account.
- Monthly maintenance fees. You may be charged a monthly maintenance fee if you don’t meet certain balance requirements.
Though checking accounts and savings accounts are different, they should ideally work in tandem. Your checking account should be your main money funnel with money coming in and going out and your savings account should be where you transfer some money from checking to stash away for the future.
You can get a checking account and savings account as a package with the same bank. This can be convenient, especially if they have bill pay, a mobile banking app, and direct deposit options. Everything can work together under one roof. One especially beneficial service is overdraft protection. If your checking account should accidentally become overdrawn, your bank could pull from your savings account so your check or purchase doesn't get rejected. The fee for this service is typically much less than the overdraft fee.
However, there are some reasons you might not want to have your savings account at the same financial institution. For example, you may be able to find a higher interest rate (APY) with an online high-yield savings account. Plus, it’s easy to access your savings account if it’s connected to your checking. If you have savings at a separate financial institution, it could deter you and add an extra barrier and help you build your emergency fund.
What to look for in checking and savings accounts
Whether you’re switching banks or opening a new bank account, there are some factors to consider ahead of time. When it comes to checking accounts, consider the following:
- Is there a monthly maintenance fee?
- Do they offer free checking?
- Are there minimum balance requirements?
- What is the APY?
- Is there a mobile app?
- Is the user experience online easy to use? (check Apple Store or Google Play store reviews)
- Is it a traditional bank, online bank, or credit union?
- How large is their ATM network? (aka how many ATMs can I use nearby to avoid ATM fees)
- If a traditional bank or credit union, is there a branch close by in a convenient location?
When reviewing savings accounts, consider the following:
- Is this a traditional savings account or a high-yield savings account?
- What is the Annual Percentage Yield (APY)?
- Are there minimum balance requirements?
- Is there a minimum opening deposit?
- Are there monthly maintenance fees?
- Is it easy to access?
- Can you easily transfer money from one account to your savings?
- Is this the same place as your checking account or somewhere different?
Answering these questions can help you review checking and savings accounts carefully so you choose what works for you and your money.
The debit card with up to 2% cash back on purchases
- Maximize your rewardsNo monthly fees
- It's quick, easy, and free to open an account
- Get paid up to 2 days early with direct deposit
- No Overdraft Fees
- 1% cash back on debit purchases
Best checking and savings accounts
If you want to open a checking and savings accounts, you can do so with a:
- Traditional bank
- Online bank
- Credit union
When it comes to APY, most of the time you’ll get the highest rates at an online bank. Online banking can offer higher interest rates because they save money on having physical branches. Here are some of the best checking and savings accounts.
Checking accounts
Capital One
Capital One is an online bank that is good for checking accounts as there are no fees or minimums. On top of that, you have access to 40,000 plus fee-free ATMs in case you need cash. They have a highly-rated mobile banking app that allows for check deposits.
Read our full review on Capital One.
Axos Bank
Axos Bank has a rewards checking option that stands out as it has a high APY for a checking account (currently at ). There is a $50 minimum opening deposit but after that, there are no minimum balance requirements or any maintenance fees. Plus, you can avoid overdraft fees and even get ATM fee reimbursements.
Read a full review on Axos Bank.
Savings account
Marcus by Goldman Sachs
Marcus offers a great online savings account that has zero minimum deposit and has unlimited withdrawals. The best part is there are no fees and the APY is . The account is FDIC-insured and you also have access to customer service.
Ally Bank
Another great option is Ally Bank, which has no monthly maintenance fees as well as no minimum balance requirements. The APY is 5x the national average according to their site and is tiered based on your balance. You can also maximize your savings by having "buckets" for your various financial goals.
Read our full review on Ally Bank.
The debit card with up to 2% cash back on purchases
- Maximize your rewardsNo monthly fees
- It's quick, easy, and free to open an account
- Get paid up to 2 days early with direct deposit
- No Overdraft Fees
- 1% cash back on debit purchases
The bottom line
Managing your finances can be tough but having the right financial tools can help — and that’s where checking and savings come in. You want to find accounts that make it easy to manage your day-to-day spending while also reaching your savings goals. Both checking and savings have different purposes but work in tandem. Ultimately, you want to find a checking and savings account that gets you money in return and is convenient for your lifestyle.
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Writer
Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, VICE, Allure and more. Melanie writes about student loans, credit, and mental health and also is the host of The Mental Health and Wealth Show podcast.
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